Understanding trading psychology is one of the most important but also most neglected tasks for investors. Of course, everyone realises that they need to analyse the investments they are considering buying. But many traders do not realise that winning in investment is also about successfully predicting what other market players will do. And that is a psychological task.
Most of the advice on the internet is not really psychology. It is quasi-psychology. You might get famous traders telling you things like “I always played tennis in the morning before my best trades to make sure I felt good.” This is useless. By all means, study what these guys do to get insights into how they analyse opportunities and maybe any tricks they have for bouncing back from a loss. But famous traders don’t have any specific training in psychology so if you are specifically wanting to improve your own trading psychology, adopting their tips (such as the tennis one above) won’t really help you in achieving that goal.
Alternatively, there are some actual psychologists who write on the topic and are experts in the field of psychology. But be careful about their specialisms. Someone who is a clinical psychologist may be an expert in schizophrenia but not necessarily other aspects of human psychology. And of course the main thing is that these experts do not have any serious trading experience, so they also can’t help you improve your trading psychology.
To identify the right sort of person, you need to ask two questions: does this person have significant trading experience and are they qualified in a related field? I am one of these people.
To try to convince you of this, I will outline my ideas on how to optimise your trading psychology. The first thing to know about is that we have a lot of cognitive biases — mental shortcuts that are often useful when we want a quick and dirty answer and often very unhelpful when we are trying to get something right. One example is Confirmation Bias, where people look only for evidence that supports what they already believe. There have been many robust psychology experiments published, that show time and time again that we do this often and consistently.
The first thing to note here is that if you use this bias when making your own trading decisions, you will make bad decisions. Every time! So you will definitely not be optimising your trading psychology. But here’s the key point: everyone else in the markets will be doing it too.
So what does that mean? It means you need to know about Confirmation Bias and think about it in a market context. Look out for it in yourself and be careful. Expect it in other market players and trade accordingly.
That’s how you stand the best chance of optimising your trading psychology.